Why Are Rates So Low?

People call in every day looking for loans. Business is brisk and rates are still really low. Frankly, I was a little puzzled about this most recent rate drop because the data suggests rates should be higher. After all, the Fed has stopped buying treauries while our government continues to borrow money like a shopoholic with a new credit card. At the same time they are also slowing down the purchase of mortgage backed securities and will stop next March. Don’t forget that all this spending WILL cause a spike in inflation and rates MUST go up as a result.

This is all public knowledge so why then are rates down near their lowest level of 2009? The answer lies in supply and demand but not how you may think. In June and July, when rates were up, fewer loans were closed. As a result, as these loans come to market about 3 months later there are fewer loans to available to buy. So even though the Fed has slowed their buying substantially they still made a significant purchase of the AVAILABLE supply of mortgages. Once the current, much higher, volume of loans hits the market supply and demand wins and rates must go higher. The only way this would not occur is if a buyer came in and soaked up the increased supply. This is not likely given inflation concerns and the availability of other well perfoming investments.

So there you have it. Rates will be higher and we can predict with relative certainty when this will occur. Like all markets things don’t move in a straight line so there will be opportunities to lock in on dips in rates as we move higher but expect to see rates in the high fives or low sixes by the middle of next year.